What Caused the Great Depression?
The great depression was one of the biggest moments in the history of the world. But what actually caused it? Why did the great depression happen and what could we have done to stop it?
History tells us that the depression happened because too many people were borrowing money and investing into the stock market. When the stock market crashed investors worried about losing their life savings took money out of the market and this caused the market to fall, more investors to lose money, and banks to collapse.
One of the most well known facts about the great depression is that it was mainly caused by too much credit. While this is true there is something that you never hear about with the depression. The whole event really started back in 1913.
The Democrat Party had just taken control of both the congress and the White House and was proposing a radical plan that would shift the control of interest rates away from the private sector and into a single entity called the Federal Reserve. The Republicans who opposed this and wanted to give more power to the private sector did not control enough seats in congress to make much of a difference. So the Federal Reserve was formed.
The first act of the Federal Reserve was to lower interest rates. This brought more money into the economy and made it easier to get more people to borrow money to invest. Things were going great and this new prosperity lead to what would be known as the roaring 20s.
So, what caused the great depression then?
Everything seemed to be doing fine on the surface, the economy was booming. But it was also very dependent on the easy credit brought on by the Feds lowering of interest rates and putting more money into the economy.
This additional money lead to inflation and made the economy dependent on easy money flowing into it by the fed. When the Fed tried to fix this by increasing interest rates suddenly there was a lot less demand for loans.
Now that there were less people borrowing money to invest into the stock market the market could not sustain the same rapid growth it had seen before. As the markets stalled smart investors sold their securities bringing stocks crashing down. The crash lead to mass panic and more overleveraged investors sold their stocks to keep from losing their life savings in the market.
As the markets crashed businesses failed and panic was in the air. This panic would start a chain reaction that would end up causing bank failures and destroying jobs. And yet this all could have been prevented if the government had decided to let the private sector create interest rates and adjust them based on supply and demand.